Russia Struggles to Find New Buyers for Commodities

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With Europe weaning itself off Russian oil, natural gas and coal, President Vladimir Putin has ordered a full-scale reorientation of Russia’s commodity exports by shipping more cargoes to Asia, building new pipelines and expanding railroad links to the East.

But in redrawing its exports map, Moscow faces significant hurdles, putting its sanctions-stricken economy further at risk.

European Union officials this week are preparing a sixth round of sanctions that aim to undercut Russia’s energy exports. Among the proposals are a phased ban on Russian oil purchases as well as sanctions on service providers, such as ship insurers, that would stifle Russian crude shipments to other parts of the world.

The new infrastructure that Russia needs to transport the exports that Europe used to buy will take years to build. It is experiencing difficulties chartering ships to transport its oil as insurers and banks fear the impact of sanctions. Major trading houses, meanwhile, are cutting their Russian business. It is also uncertain how much of Russia’s commodities big buyers such as China would be willing to buy, as Beijing looks to diversify its suppliers.

Whether Russia succeeds in rerouting its commodities flows carries high stakes for the Kremlin.

Oil-and-gas sales contributed nearly 42% of federal budget revenues in the first quarter of the year. Elevated energy prices following the invasion of Ukraine have been filling Russia’s coffers, partially compensating for the loss of customers in Europe. A long-term decline in exports, however, may make spending cuts necessary, at a time when Russia is looking to support its economy and avoid social unrest as incomes fall.

The export shake-up is also crucial for the global economy. Russia grew in recent decades into a leading exporter of a range of commodities to the world, akin to a giant gas station and mining pit for international buyers. Disruptions in the trade amid already tight global markets would further fuel inflation in the West.

“Russia’s energy pivot to Asia faces infrastructure bottlenecks, uncertain demand and cumbersome logistics,” said Maria Shagina, visiting senior fellow at the Finnish Institute of International Affairs. While China and India could increase some of the Russian imports, that “cannot compensate for the loss of the European market,” she said.

Last month, Mr. Putin ordered his government to draw up plans to expand energy-export infrastructure to countries in Asia, Africa and Latin America by June 1. The plan includes building new oil-and-gas pipelines from Siberia as well as the development of the Northern Sea Route, a shipping passage along the Russian Arctic coast.

“Let us assume that energy supplies to the West will continue going down in the foreseeable future,” Mr. Putin said. “It is necessary to speed up the implementation of infrastructure projects—on railways, pipelines and ports—which will make it possible to redirect the supplies of oil and gas from the West to promising markets in the South and the East in the next few years.”

Those projects include a gas link to China via Mongolia, providing an alternative to the $55 billion Power of Siberia pipeline opened in 2019. Russian state-owned natural gas giant Gazprom PJSC signed a contract to design part of the new link on Feb. 28, four days after Russia invaded Ukraine.

China, however, has yet to sign on to the project. In oil, the country cut back its purchases from Russia by 14% in March. Beijing has long touted diversification of its energy supplies and has other suppliers, from the Middle East for oil and gas to Australia and the U.S. for liquefied natural gas.

Japan, meanwhile, has pushed ahead on a Siberian natural-gas project as it looks to increase its gas imports from Russia.

For decades, Russia’s oil-and-gas export infrastructure was geared mainly toward Europe, by far Russia’s biggest energy market. That includes one of the world’s largest crude pipeline systems, the Druzhba, meaning friendship in Russian.

Russia has found a willing customer for its oil in India, which counts Russia as its biggest arms supplier and has stayed neutral in the Ukraine conflict. Having bought only one cargo of Russia’s flagship Urals oil blend between January and February this year, India sourced around 700,000 barrels a day in April, according to data provider Kpler.

The downside for the Kremlin is that India is buying Russian crude on the cheap, both reducing Moscow’s revenues and keeping prices low for other buyers. In March, India struck a deal with Russia to purchase crude oil at a discount of at least 20% to global benchmark prices.

“The big risk for Russian producers will be that Russia becomes a perennially discounted seller,” said Viktor Katona, energy analyst at Kpler.

Another problem for Russia is that some insurance underwriters are refusing to deal with vessels carrying Russian crude, arguing that the compliance risks are too high, Mr. Katona said. The next round of European sanctions could make it even tougher on insurers to do business with Russian oil, according to EU diplomats.

Meanwhile, some of Russia’s Chinese and Indian customers, such as refineries, have been having trouble getting bank funding for the shipments, said George Voloshin, an analyst at consulting firm Aperio Intelligence.

In coal, Russia usually sends around a third of its exports to Europe and half to Asia. But while demand for the commodity is growing in Asia, Moscow is facing problems getting it there, including longer distances than to Europe, railway congestion and higher insurance premiums, Mr. Voloshin said.

In metals, steelmaker Severstal PAO has said it would redirect its sales to Asia, South America and the Middle East. Analysts say Asia and South America have enough of their own steel. The sudden strengthening of the ruble, propped up by Russia’s central bank, is also eroding a competitive advantage, a person familiar with the matter said.

“We definitely see strong demand [for] our products, but are not ready to report specifics and volumes as we continue to work on technical issues including logistics,” a Severstal spokeswoman said.

Even where Russian companies aren’t sanctioned, they have faced steep hurdles.

MMC Norilsk Nickel PJSC hasn’t been sanctioned, and its palladium and nickel, two metals that are essential to greener transportation, are in massive demand. But it still has struggled with logistics, its oligarch chief executive, Vladimir Potanin, has told Russian television.

Palladium is transported by plane, but the closure of the skies around Russia has made getting it out of the country harder, while European ports have refused to unload the company’s cargo, Mr. Potanin said. A company spokesperson declined to comment further.

Source: Wall Street Journal

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